Question

a. Provide two examples of actions you have taken (or will take in the future) to build good credit, and link each example to one of the steps to building good credit provided in the text. --> (If you paid your bills on time, carried only a reasonable amount of debt, didn’t max out your credit cards, had a history of borrowing, hadn’t applied for a bunch of new loans, and borrowed from a mix of lenders, you’d be in good shape. Your FICO score would be high and lenders would like you. Because of your high credit score, they’d give you the loans you asked for at reasonable interest rates.)

     b. Describe two of your own financial goals and how you expect to achieve them. See Figure 15.8 for examples. Your answers can go beyond the examples shown in Figure 15.8.

     c. Review Figure 15.9. Why is it important to create a personal budget, and perhaps even more important to compare actual results to your budget?

     d. What is meant by the phrase “pay yourself first”? (As a side note, the dollar amount saved on a monthly basis is not as important as getting in the habit of saving. The dollar amount can be increased over time. If you don’t currently have a savings plan, start with a small amount, even if it’s just $5 per month.)

Figure 15.8 Joe's Goals Short-term goals (less than 2 years) Intermediate-term goals (2-5 years) Long-term goals (more than 5 years) • Pay off car loan • Pay off credit card and charge account debt . Complete college • Take one-month vacation after completing college - Pay off student loans Buy a home Save for retirement Figure 15.9 Joe's Budget Joe College's Budget for year ending August 31, 2013. Budget Actual 19,000 S 300 favorable CASH INFLOW Waces Student loan Total CASH OUTFLOW Housing 18.700S 7 000 25,700 7000 26,000 Rent 5.100 700 5.100 800 800 100 unfavorable 800 2,300 2.100 1,300 200 favorable 100 unfavorable 1.200 100 unfavorable 1300 900 1400 900 Utilities electricity, heat, water, TV cable) Communkation phone and internet Food Groceries Eating out Transportation Gas and maintenance Car loan payments Persondi and health care Medical co-payments and dental Clothing Laundry/cleaning supplies/miscellaneous Recreationtertainment Nightlife/movies/concerts Magazines/music/miscellaneous Education 200 300 300 100 1 1 00 unfavorable 00 unfavorable 100 100 unfavorable 1.000 200 2 00 5.500 Tuition Books 5.500 1.000 1.000 Car, health, renter's Savings Other expenses 1,700 1.200 800 1.200 600 24,300 1,700 200 favorable 200 unfavorable Total 24.100 Surplus (Deficit) $ 1,600 $ $ 100 favorable

Answer 1

Part a)

Two examples can be:

1. Always kept credit card utilization to below 30% of the maximum limit: This is related to the step of not maxing out the credit card.

2. Always paid credit card bills before the statement due date: this is related to the step of paying bills on time.

Part b)

Two financial goals with ways to achieve them:

1. Buy a home: The goal is to buy a medium-sized 2-3 BHK home at a location with good availability of resources & reasonable prices. It may cost around $200,000. It will be bought in around 5 years from now and part of the cost will be financed as a long term mortgage. We would need to save for the part which would be paid as a down payment. The goal is to save as much as possible to cover the cost so that the loan principal of mortgage can be minimized. For this, we would start investing in good stocks & mutual funds with an investment horizon of 5 years and more.

2. Save for retirement: To save for retirement so that we can continue the same standard of living, meeting all regular expenses even after the regular income stops. If we estimate that we will need $100,000 per year after retirement (after adjusting for inflation) for 20 years starting at the age of 60, we need to save around $8000 to $10000 every year for 30 years. We would need a rate of return of around 10% on our savings which can be achieved using growth stocks & index funds etc. Also, some parts of the savings may be put in pension plans like 401(k).

Part c.)

Importance of creating a personal budget & comparing actuals with budget have many advantages as highlighted below:

1. By creating a budget we can get a realistic estimate of how much we are going to spend in a coming time period and whether our expected incomes will be sufficient to meet those expenses or not.
2. The tendency to overspend gets checked over the time as we get to see our spending patterns and where we overshot our own budget estimates.
3. We can modify our lifestyle across various categories if we see that a particular category is taking up a huge portion of our budget without providing much utility.

Part d)

"Pay yourself first" simply means to save for your future first before starting to pay other bills such as credit cards, utility bills etc. The importance of this is to create a habit of saving first & then spending because if the habit of saving is not there we can end up spending all of our earnings without being able to save for the future which can land us in financial hardships in the future.